Tenet Has Dug a Narrow Moat After Reducing Leverage and Boosting Economic Profit Margins

Since late 2017, Tenet Healthcare has undergone a massive turnaround effort in the wake of an acquisition strategy that left it with operating inefficiencies and a debt-heavy balance sheet. In recent years, Tenet’s new leadership has improved governance practices, pruned its portfolio of assets through divestitures of underperforming hospitals, and undergone a restructuring effort. Operationally, Tenet has been expanding its high-acuity service lines in its outpatient surgery centers, improving operating efficiencies inside and outside its healthcare facilities, and increasing focus on service quality. All these factors appear to be positively influencing returns on invested capital at Tenet, which now regularly operates with ROICs moderately over the weighted average cost of capital. We applaud those trends. We also like the firm's increasing focus on the high-margin ambulatory surgery business, which represents a higher margin and higher growth opportunity for the organization than its acute hospital operations.